Magazine

What a Career Break Can Do to Your Finances

By Sallie Krawcheck

February 20, 2018

You and your salary are the biggest drivers for meeting your financial
goals. But sometimes life happens, and you want to—or need
to—take some time away from work.

I get it. I’ve taken a few career breaks myself. When I became pregnant
with my son, I was an investment banker, and I came to the conclusion
that there was no way I could gestate him and work those hours. So I
quit and went home… without a job or a real plan.

I wouldn’t recommend that to anyone.

A year later, I found another job as a research analyst—earning
around 60% of what I’d been making before I had walked away. It eventually
turned out really well because I loved being a research analyst, but I had never imagined I would take that kind of pay cut.

And I’m not alone.

I get it. I’ve taken a few career breaks myself.

According to an Ellevate Network survey from August 2015,
one in five women reported a pay cut of 20% or more after taking a career
break. And at the time of the survey, another 20% hadn’t been able to
find a job to come back to yet. (This feels accurate: Someone approaches
me at least once a week to ask about how to get back into the work world
after taking a break.)

Despite those unappealing prospects, in another poll, we found that 30%
of professional women had taken a planned career break, 25% had taken an
unplanned one and 11% plan to take one at some point in the future.
Clearly, taking time off is a consideration in the majority of working
women’s lives.

And I’m all for it.

But it’s important to go in with eyes very wide open and recognize the
financial trade-offs that come with a career break.

First, let’s quantify the cost of a career break for Elle. Let’s say Elle is a 30-year-old professional woman, earning $85,000 a year. She saves 20% of her salary and stashes it in the bank. She plans to take a two-year career break in five years. When she returns, she takes a 20% pay cut. And it impacts her every year for the rest of her career, since she’s getting raises off of a lower base.

How much does this cost her, in aggregate earnings, over 40 years? $1.7 million. That’s how much less she earns over that period of time.

And where does this leave her as a grandma, when she retires? About $400,000 poorer.

(If Elle puts 20% of her salary into a savings account, she would have saved $1.5 million over 40 years. If she takes a career break, her savings would amount to only $1.1 million…so this matters…a lot.) And that’s before you take into account lost health insurance, Social Security contributions and other employee benefits while she is away.

So what can you do if you want to take a career break?

Like your other life goals, you should plan and save for it. In this case, you should make sure you have more than enough money set aside to cover you for the duration. You should already have an emergency fund, which should hold enough cash to pay for at least three months' worth of necessities. Definitely beef up your savings beyond that. If you want to take a yearlong hiatus from work, if possible, save at least enough for that year plus three months before you put in your notice.

If you're married and plan to rely on your partner's income to cover expenses, test the wheels first. Before you quit, try living on the one income and put 100% of your pay into your emergency fund. You'll find out soon enough whether your plan is viable.

Also consider how you might be able to pull in extra cash during your break. Perhaps you could take on some freelance work or pick up a part-time gig. Maybe you have some investments that are earning income.

And be sure you’re ready to cut back on your expenses as much as possible.

Finally, you may want to find ways to fill your resume while you're not working full time. Freelance or part-time work can do the trick while earning you some extra income. You can also volunteer for a cause that's important to you. Or consider starting a blog about your area of expertise.

But the biggie? Invest regularly.

If Elle had invested in a diversified investment portfolio (instead of keeping her money in the bank), we estimate that she would retire with anywhere from $1.6 million to $2.5 million in savings, depending on market performance. Recall, that compares to $1.5 million she saves without taking a career break (but keeping her money in the bank). By virtue of investing, she more than pays for the cost of her break; she can retire with more than if she never took that break and stayed with the bank. *

That can be the power of investing regularly and having the investments grow over time.

We project Elle’s salary with and without a career break,
using a women-specific salary curve that includes inflation
from Morningstar Investment Management LLC, a registered
investment adviser and subsidiary of Morningstar, Inc.
We assume Elle takes a 2-year career break in 5 years, and
returns to a job paying 20% less than her salary at the time
she takes the break. We add up her annual salary amounts under
both scenarios over a 40-year period. $1.7M is the difference
between the two sums.

The savings account results assume a 1% long-term average annual
cash return. The investment account results assume a low cost
diversified portfolio comprised of 60% Large Cap US stocks and
40% US bonds, which is rebalanced to this allocation each year.
These results are determined using a Monte Carlo simulation—a
forward-looking, computer-based calculation in which we run
portfolios and savings rates through hundreds of different
economic scenarios to determine a range of possible outcomes.
The results reflect an 85% likelihood of achieving the amounts
shown or better, and include the impact of inflation and taxes
on interest but not capital gains or fees.

The results presented are hypothetical, and do not reflect actual
investment results, the performance of any Ellevest product, or any
account of any Ellevest client, which may vary materially from the
results portrayed for various reasons. The results presented are not
for any specific product and do not take into account specific product
fees. Financial forecasts, rates of return, risk, inflation, and other
assumptions have been used as the basis for the results presented.

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